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Our Weekly - The Fiscal Cliff

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The impending and dreaded so-called fiscal cliff is a deadline on a group of bills and legislative acts that currently govern almost all facets of the federal government, with many of the current laws, tax codes and more set to change or expire simultaneously.

This is a deadline that if not avoided by timely and effective congressional action, will trigger severe and nearly immediate funding cuts--sequestration--in federal programs and services along with tax increases estimated in the $650 billion range, according to the Congressional Budget Office.

The major portion (approximately $500 billion) would be caused by increased taxes when the Bush and other tax cuts expire, combined with Congress' refusal to patch the Alternative Minimum Tax (AMT).

AMT is a tax that was originally created to make sure that the rich do not accumulate too many deductions and do pay some income tax. However, over the years more middle-class Americans have become part of this taxpayer mix.

Traditionally, Congress passed a fix that exempted most of the people who would have to pay the AMT. However, the last fix expired in 2011, and if a new one is not enacted by the end of December, about 28 million more households would owe "very large, unexpected" AMT liability for 2012, according to the IRS, and they would owe the tax on the returns they file in the spring of 2013.

Other factors involved in the so-called cliff include expiration of both the 2001 and 2003 Bush tax cuts, the 2009 stimulus package, the payroll tax holiday, business expensing and the expiration of other temporary tax code law changes that Congress passed, and generally referred to as tax-extenders.

The Congressional Budget Office, which conducts nonpartisan analyses for the U.S. Congress, contends that the increase would be $65 billion in 2013, with the balance coming due in the next few years.

The program cuts that come along instantly with these higher taxes that would largely and disproportionately affect the working poor and now shrinking middle-class.

Taxes are expected to rise on average nearly $2,200 for a single middle-class filer to as much as double that for an average family of four.

The other side of this budget disaster is the automatic cuts in the funding of federal programs, again called sequestration. This would cause equal cuts in defense and non-defense spending with a major portion of non-defense cuts coming from Medicare payments to physicians, reduced unemployment benefits, as well as cuts in Social Security and other social programs.

Many in the nation's economic community feel these actions, or Congress' lack of action, by midnight Dec. 31, 2012., could possibly trigger another deep recession.

Economist Wilhelmina Leigh said this impasse is not due to any one thing, nor is it attributable to recent economic shortfalls, but has been brewing for years. Leigh is a senior research associate at the Joint Center for Political and Economic Studies in Washington, D.C.

"The U.S. has been on a collision course for the last decade or so, where we're spending more and taking in less in revenues," said Leigh. "We haven't been able to change that pattern of behavior because members of Congress weren't really willing to, and now all sorts of things have converged--our deficit each year has been adding up over time, so now we have a huge debt."

Leigh said what has contributed to the problem is opposing and temporary legislative moves by the current Congress, combined with those made under former President, George W. Bush, where Congress temporarily (from 2001 to now) changed the tax code from what existed under President Bill Clinton prior to 2001, to current laws that favor the wealthy.

The tax code prior to 2001 had a more graduated scale that taxed the rich more heavily and produced not only a balanced budget by the end of Clinton's second term, but produced a surplus budget before Bush took office.

Speaker of the House John Boehner continues to oppose tax hikes in favor of reforming the nation's tax code, which he says will put more revenue into the economy.

Added to all of that, congressional bills often have riders (companion legislation) that reflect the opposing party's legislative agenda. These riders sometimes act as a balancing factor and are a compromise to aid passage.

The majority party nearly always has the leverage; so in the last two years, Republicans have had the upper hand and have been able to force Democrats into compromises on the House side of Congress.

These compromises include forcing the current extension of the Bush-era cuts rather than reforming the tax code or reverting back to the Clinton era tax codes.

U.S. Representative Karen Bass (D-CA) explained how the two parties differ in their approaches."Democrats have compromised on cuts and have been willing to cut," said Congresswoman Bass. "Democrats have also been willing to look at Medicare, Medicaid and Social Security, but not from the perspective that the Republicans are, which is how to privatize the programs. But you can find savings; you can make cuts in those programs without compromising services to seniors, the disabled and the poor."

"In order to address the critical issues that our country faces in terms of the economy, compromises have to be made on both sides," she continued. "Democrats have to compromise and Republicans have to compromise; but in compromising that does not mean it becomes an excuse to completely restructure programs to serve an ideological agenda."

With his re-election, Bass says the "the president has the cards in his hand this time. "He won clearly; it was not even close. He got over 300 electoral votes. The president only needed 40 or 50 electoral votes to win. I think that he clearly has a mandate to lead; he ran on raising taxes on the wealthy, and I believe he clearly has a mandate to do that. If the Republicans stonewall this time, then taxes go up on everybody, including the rich.So that's why the ball is in the president's court, he's got the leverage this time."

About a week after Obama's re-election Republican House Majority Leader Eric Cantor was calling his party the provider of solutions: "We are going to be a results-oriented majority about solutions, just as we have been in the past. We want solutions that will get people back to work.We want solutions that will help save Medicare for those who need it. We want to make sure there are solutions in place for the myriad of challenges people are facing. That's why we are saying to the president, we want to work with you on solutions. We don't understand why raising tax rates is the solution, if you want to see people get back to work.

"The Speaker has extended his hand to say, we want to work with you, Mr. President. We understand that he won re-election, as did we. We want to go forward together in cooperation to solve the problems, not just posture."

"We don't think that raising tax rates is something that is good for this economy or that will help grow jobs. We have said there are ways for the federal government to have more revenue if we grow this economy and engage in tax reform. That is the proposal we have on the table. Let's remember what all this is about. You could put taxes at 100 percent on the wealthy and not solve the problem of the spending. We have got to get to the problem and stop digging this hole in terms of spending money we don't have. You're running a trillion dollars of deficit every year. The proposals we put on the table stop that."

Bass points out that the situation is similar to the end of 2011, when President Obama proposed a payroll tax cut--an idea that is actually a Republican policy--but because it came out of his (the president's) mouth, they were against it," explained Bass.

"So this (resistance to the president's agenda to raise taxes on the rich and lower them for the poor) is the same kind of thing, he's saying extend tax cuts for 98 percent of the U.S. population. So are they going to block that? This would mean that they're responsible for raising taxes on 98 percent of Americans."

"I think that over the last few years the Republicans said their No. 1 priority was to make sure that the president was not re-elected," said Bass. "Since they failed at that they have essentially been disoriented as to what to do now."

Economist Leigh concurred with Bass that congressional Republicans were more concerned about preventing President Obama's re-election and wasted months of valuable time at the public's expense. She continued to define the events that led to this fiscal cliff.

"Clearly the members of Congress didn't want to do anything that would cause any one of them to be viewed in a negative light," Leigh continued and referred to the Budget Control Act of 2011 as a final move that caused the nation to stand at this fiscal cliff.

"We passed the budget act last year in an attempt to force us to reign in things (such as the economic downturn and an increasing national deficit), but we still haven't been able as a nation to get on the same page about exactly the way to do it." Leigh spoke of how both ends of this spectrum need to be resolved by Congress in order for America to have a solvent and sustainable budget and national economy.

"We're facing the prospect of having all the tax cuts expire at the same time, and we're still going to need some more revenue," Leigh continued. "We're also going to be faced with having budget cuts made in a lot of programs and both of those are likely to cause considerable pain and anguish among all segments of the country.

"The U.S. government is one household, and if that household spends more money than they have, they'll have a lot of debt. If household A expends more money than they take in, then the only way they can do that is by having credit cards.

"Credit cards operate in the same fashion that the bonds that we sell to foreign governments operate," Leigh pointed out. "It's a way of other people lending us money, and we have to pay them interest so that they will keep lending us money."

Both sides had previously issued statements to the press and public on specific issues declaring that they were not willing to compromise.

Complicating the situation further was a promise many Republicans had previously signed with political backer Grover Norquist stating that they would never raise taxes (primarily protecting the rich) under any circumstances and were determined to cut social programs.

Republicans held to this tax promise throughout the last term and up until the election.But now things are changing, Bass said.

"Not all of the Republicans have signed it. A number of them, especially the new ones, did not sign it and Grover Norquist is quickly becoming irrelevant."

The irony here is that this fiscal cliff was initially created by the nearly same Republican majority-led congress that extended Bush-era tax cuts to protect the rich and refused to act in time earlier this year, having used delaying tactics before and during the election season for strictly political reasons with little regard for the forgotten 98 percent of Americans mentioned by Bass.

Congresswoman Bass is optimistic that the fiscal cliff will be avoided in time.

"I'm actually optimistic because the Republican leadership, as in Speaker Boehner, does seem to want to get a deal done, and I believe a deal will get done. I believe taxes on the wealthy will go up," she said. "Because if absolutely nothing is done by the end of the year, all of the Bush tax cuts expire and taxes will go up on families. The Republicans do not want that to happen on their watch."